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CA Issues New Guidance on Nonresident Income Tax Implications of Working From Home During COVID

by Alex Thacher

Summary

At the beginning of the COVID-19 emergency, California Governor Gavin Newsom issued an executive order that required individuals to work from home. California’s Franchise Tax Board (FTB) recently created an FAQ page to answer questions regarding residency and the income tax implications for nonresident individuals working within the state due to the pandemic.

In Detail

Executive Order N-33-20, issued by Governor Newsom in March 2020, is a public health order that required employees to work from home. According to the FTB FAQ page, “the FAQs are applicable until the Governor's Executive Order is no longer in effect.

The FTB included in its FAQ three scenarios concerning residency and the income tax implications for nonresident individuals who are working within the state due to COVID-19 restrictions. These scenarios are summarized below.

Scenario 1 deals with a nonresident employee working for a company located outside of California who temporarily relocates to California to telework due to the pandemic. This employee is issued a California W-2 by the company.  The nonresident here would need to file the California nonresident or part-year resident income tax return. This return, also called Form 540NR, is used to report the California-sourced portion of the employee’s compensation. The sourcing is the total amount of the employee’s income multiplied by a ratio of days worked in California over the total days worked worldwide.

Scenario 2 deals with an employee who works for a California employer and temporarily relocates to California to telework during the pandemic. The employee is required to file personal income taxes in California because they performed services in California for wages.

Scenario 3 deals with independent contractors working during the pandemic. Generally, if the independent contractor’s income was not California-sourced before the pandemic, it would not be considered California-sourced if the only action was temporarily moving to California during the pandemic. However, the FTB has stated that the “benefit of the service” test will be used to determine if the income should be sourced to California. In other words, the income is sourced where the benefit of the service is received in California. The location where the services were performed does not matter.

Insights

The remote work environment has caused adjustments to individual state reporting requirements depending on the circumstances of teleworking.  States are continuing to issue guidance on these matters, and taxpayers should continue to monitor updated requirements to see if a report is due. You can refer to our COVID Relief matrix to see which other states are offering similar guidance.

If you have any questions, reach out to our experts.

November 19, 2020

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Alex Thacher - Partner, Tax - San Jose, CA | Armanino
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